14. Investment property

The investment property can be specified as follows:

 

2018

2017

Investment property as at 1 January

4,778

4,207

Acquisitions

1,359

10

Capital expenditure on property

34

25

Transfer from property under construction

385

80

Property sales

(292)

(81)

Revaluation

760

537

Investment property as at 31 December

7,024

4,778

The fair value of completed investment property has been determined on a market value basis, in accordance with International Valuation Standards (IVS), as set out by the International Valuation Standards Council (IVSC).

The valuation is prepared on an aggregated ungeared basis. As set out in Note 4, in arriving at their estimates of market values, the valuation experts have used their market knowledge and professional judgement rather than relying exclusively on comparable historical transaction data.

The €1.5 billion acquisition of the former Delta Lloyd portfolio in June 2018, was largely paid in equity (€1,080 million was paid in newly issued participation rights) which classifies as share based payment.

The valuations were performed by accredited external independent real estate valuation experts with a recognised and relevant professional qualification and with recent experience in the location and category of the investment property being appraised.

The fair value of the assets is driven by the net cash flows generated by the assets, which are taken into account by the market, in combination with the discount rate development. The generated cash flow is the net rental income plus the net sales proceeds from the sale of individual units.

The following main inputs have been used in the valuation of the investment property:

 

2018

2017

Average

Sell

 

Hold

Sell

 

Hold

Discount rate (%)

6.4

 

5.6

6.3

 

5.7

Exit yield (%)

5.1

 

5.1

5.8

 

6.2

Rental growth (%)

2.3

 

2.3

1.9

 

1.9

Vacant value growth (%)

2.7

 

2.9

2.3

 

2.2

       

Sell

2018

2017

Region

primary

secondary

other

primary

secondary

other

Discount rate (%)

6.4

6.5

6.5

6.2

6.4

6.6

Exit yield (%)

5.0

5.6

7.0

5.6

6.1

6.9

Rental growth (%)

2.3

2.2

2.0

2.0

1.8

1.8

Vacant value growth (%)

2.7

3.1

1.9

2.4

2.0

1.9

       

Hold

2018

2017

Region

primary

secondary

other

primary

secondary

other

Discount rate (%)

5.7

5.6

5.4

5.5

5.9

6.4

Exit yield (%)

5.1

5.1

5.7

5.8

6.6

7.3

Rental growth (%)

2.3

2.2

2.4

2.0

2.0

1.9

Vacant value growth (%)

2.9

2.7

2.9

2.3

2.2

1.8

       

Sell

2018

2017

Rental segment

<711

>711 < 1200

> 1200

<711

>711 < 1200

> 1200

Discount rate (%)

6.4

6.4

6.4

6.3

6.3

6.2

Exit yield (%)

5.9

5.2

4.5

6.5

5.8

5.3

Rental growth (%)

2.1

2.3

2.3

1.9

1.9

2.0

Vacant value growth (%)

2.2

2.7

2.8

2.2

2.3

2.3

       

Hold

2018

2017

Rental segment

<711

>711 < 1200

> 1200

<711

>711 < 1200

> 1200

Discount rate (%)

5.7

5.6

5.8

6.0

5.6

5.5

Exit yield (%)

5.3

5.1

5.5

7.1

5.9

5.7

Rental growth (%)

2.2

2.3

2.3

1.9

2.0

2.0

Vacant value growth (%)

2.8

2.9

2.8

2.1

2.2

2.4

In almost all segments, the discount rate is higher than the exit yield. This can be explained by the current market in view of increasing prices and decreasing yields for residential complexes. The opposite situation (discount rate < exit yield) in the segment “Other” is caused by the higher investment risk related to this type of real estate (less value-fixed real estate (example: residential complexes in the higher rental segment) is more sensitive to market forces).

These inputs are considered to be the most important drivers in the valuation of investment property.

External independent real estate valuation experts determine the fair values using discounted cash flow models with a 10-year period. When calculating the present values, the valuation experts use discount rates in the DCF models to account for the time value of money and reflect the inherent risk with regard to the cash flows in the model. Exit yields are indicators used to determine the exit values that can be achieved at the end of the DCF lifetime. Rental growth is the average rental growth in the 10-year period of the discounted cash flow model. Vacant value growth is the average vacant value growth in the 10-year period that is assumed in the cash flow model.

Sensitivity analysis

The table below presents the sensitivity of the valuation to changes in the significant parameters driving the underlying valuation of investment property.

 

-100 bps

Fair value 

+100 bps

As at 1 January 2018

   

Discount rate

5,119

4,778

4,562

Exit yield

5,164

4,778

4,593

Rental growth

4,672

4,778

5,017

Vacant value growth

4,763

4,778

4,928

    

As at 31 December 2018

   

Discount rate

7,463

7,024

6,563

Exit yield

7,672

7,024

6,505

Rental growth

6,715

7,024

7,327

Vacant value growth

6,924

7,024

7,126